Questions you should ask

Before entering into any new financial arrangement there are a number of things every business should consider:

Up-front commitment of funds

Businesses usually seek finance solutions because they don’t want to raise funds internally from cash reserves.

Are you better off using external sources rather than existing sources of funds for capital purchases?

Surety/collateral

Is providing security or supporting collateral for finance a barrier for your business?

Repayments

Are you certain that you can meet the repayment obligations for the full term of the contract?

Could the repayment obligations vary (for example, with a variable interest rate)?

Residual payment

A residual payment at the end of the contract can be used to reduce the size of repayments. In some cases a residual repayment is required if you wish to take ownership of the solar system. This payment will usually be around the market value for the system after depreciation.

Ownership of the asset and balance sheet impact

Are you able to access debt or are there clear benefits to avoiding new debt on your balance sheet, for example the impact on existing loan covenants and the ability to obtain further finance?

Is there a good reason for you to own assets?

Who will own the solar system at the end of the contract? If you don’t own it, how much will it cost to buy the energy once the contract ends?

Tax treatment

If you own the asset, you can usually claim deductions for interest, fees and charges, while claiming depreciation against the capital value of the solar system. If you don’t own the asset, all payments are deductible.If a residual payment is required at the end of the contract to transfer ownership to you, then you may need to claim depreciation for the remaining life of the asset. GST will also apply differently to different options and payments.

What are the tax implications of the financial options?

What is your preferred approach to claiming deductions?

Performance risk

Who will bear the risks and costs if the system doesn’t perform as expected - you, the solar retailer or the financier?

Is it worth paying more for guaranteed performance? How will performance be monitored and measured and over what timeframe?

Feed-in-tariffs

Grid-connected systems can export excess electricity to the grid. Energy retailers are not required to pay for exported solar electricity, though many will. A ‘feed-in tariff’ is generally lower than the rate for grid electricity. It will generally not provide enough financial return to repay a system that generates more electricity than you use. Do you know what feed-in-tariff your energy retailer offers? Should you include this potential income in your business case? The Independent Pricing and Regulatory Tribunal of NSW (IPART) publishes benchmark feed in tariff price.